July 27, 2017

Circulation Theory, Part 5

Here was our profit table from yesterday.

My homework assignment was this ... what is the right strategy for this in-home date?

It should be difficult to answer this question, for obvious reasons.

What is the best strategy for Segment 1?  160 pages.

What is the best strategy for Segment 2?  128 pages.

What is the best strategy for Segment 3?  128 pages.

What is the best strategy for Segment 4?  96 pages.

What is the best strategy for Segments 5-10?  32 pages.

What is the best strategy for this company?

If you talk to somebody from Xerox, they'll tell you to create every version of the catalog, paginated based on customer merchandise preferences ... creating thousands of different versions. And they would be right.

But you're not going to do that, because you want to accurately forecast demand at an item-level so that your inventory buys are appropriate (even though you can forecast accurately online where you have no control over what the customer looks at).

And you are unlikely to create multiple versions of a catalog, even though the data is telling you that's exactly what you must do - because that creates added complexity and you don't have the staff to handle added complexity.

Your paper rep and your printer are going to tell you to go with a large page count because of various vendor discounts/incentives.

Your co-op rep, however, should be strenuously screaming at you to go with a small page count because you will mail many more prospects and the co-op will make a ton of money in the process.

Yes - your paper/printer partners and your co-op partners are at complete odds ... when one partner wins, the other partner potentially loses. This is a secret I'm not even certain the co-ops understand ... but if they were smart, they'd be running circulation grids for you and they'd be screaming at you to go with low page counts.

As an industry, catalogers tend to align with their paper partners - the USPS and various Printers tell you that you are "saving" money by going with larger page counts.

But the table above clearly indicates that by "saving" money you reduce circulation.

What happens when you reduce circulation?
  • You reactivate fewer customers.
  • You acquire fewer customers.
What is the most important aspect of marketing a catalog brand?
  • Reactivating customers and Acquiring customers.
So now we have a bunch of conflicting factors at play.
  • Your paper partners give incentives to have large page counts, but are fine with small page counts mailed to many people.
  • The USPS gives incentives to have large page counts.
  • Your co-op and list partners profit when you have small page counts.
  • Xerox wants you to have 80,000 versions of a catalog.
  • Your staff can only handle one or at most two versions of a catalog.
  • Your best customers want many pages.
  • Your marginal customers and prospects are unprofitable at large page counts.
  • Your CFO is yelling at you to increase demand and increase profit, which is impossible with only one version of a catalog.
What do you do?

As an industry, we're being pushed toward lower page counts - this is unavoidable. We're competing against digital strategies executed in real-time - you cannot compete by tossing large page counts out there that require six months of planning. Those days are over. Your online customers cannot support large page counts (as their organic percentage is high, thereby pushing them into Segments 7-10 in our example above). And as the table shows us, large page counts ruin prospecting efforts ... the most important part of being a cataloger (prospecting) is sub-optimized by a lust for large page counts.

So we have no choice but to move to smaller page counts.

But what about the meaty levels of profit generated at large page counts by best customers?

Here's how you work around this issue. You alternate strategies.
  • In-Home #1 = Large Page Counts, mailed only to best customers. This catalog has your full assortment of new merchandise. Your best customers pay for sub-optimal new items. By sending this only to your best customers, you avoid all of the losses that happen with marginal customers who don't spend enough on marginal merchandise to generate profit.
  • In-Home #2 = Small Page Counts, mailed as deep as you can humanly mail the small catalog. The catalog is absolutely stuffed with only winning items - with callouts to look at new/marginal items online. This is where you do all of your prospecting and reactivation work.
If you do this, you get a lot of benefit with minimal compromise.
  • Your paper partners are happy because you mail a large page count book shallow and a small page count book deep.
  • Your co-op and list partners are happy because you spend a ton with them on alternating prospect-heavy mailings.
  • Your CFO is happy because you generate a ton of profit from your best customers on large page counts and you increase prospecting efforts which generate a ton of profit for you next year.
  • Your staff is happy because they don't have to come up with inventory plans for 80,000 personalized versions of a catalog.
  • You are happy because you ran the simulations and you know what the right thing to do is.
This doesn't have to be difficult. Alternate your strategies. Large mailings sent only to best customers chocked full of new merchandise ... and then very small mailings sent deep into your file (and to prospects) stuffed with winning products and winning creative (to push productivity as high as possible to push circulation as deep as possible).

Need help figuring out what is right for your business? Email me (kevinh@minethatdata.com) and we'll figure it out together.